Cutting Through the Startup Hype: Real Financing for Entrepreneurs

There are reasons why Luis Martín Cabiedes is considered a benchmark business angel in Spain, but he prefers to think of himself as a caretaker of businesses still in their infancy. His 2015 book on how to secure financing for startups promises to be essential bedtime reading for aspiring entrepreneurs and for investors in digital businesses.

Cabiedes, who has taught at IESE since 2008, brings a decade's worth of experience investing in the launch phase of tech companies such as Trovit, Privalia and Offerum. He now has more than 50 startup investments under his belt.

In his book, Cabiedes aims "to share all I've learned over the past 15 years in order to demystify and bring back some sense to the process of investing in the Internet, so that new entrepreneurs are not swept away by the siren call of mentors, advisors and politicians who talk of 'entrepreneurship' despite never having started a company."

On the Hunt for Investors
Most entrepreneurs are obsessed with finding investors for their projects, looking for silent partners, business angels, banks, venture capital funds or state-run agencies that support entrepreneurship and innovation.

They're so busy on this hunt that they forget that the main source of funding for a company is its own customer base.

But what are the best ways to secure financing from customers? The book describes a number of different formulas, including a pay-in-advance model, subscriptions, scarcity models, marketplaces (with barter), and a normalization and resale strategy.

These models are all ways to "bootstrap" a business, working with limited financial resources and little or no initial capital.

What Business Angels Want
If the above formulas fail to secure enough financing, it's time to bring in a professional investor. Here, Cabiedes steps up with advice on where, when and how to approach a potential investor. He also offers tips for pitching convincingly, avoiding pitfalls and setting up a successful first date.

It's easy to lose sight of what inspires investors to put their money in one startup and not another. Cabiedes insists on three things: viability (with a specific market and a clear competitive advantage), scalability (with growth potential) and investability (offering a clear path to a return).

In fact, Cabiedes recommends looking at six criteria for evaluation as defined by his colleague Rob Johnson -- an entrepreneur, investor and visiting professor at IESE. Those six are: market, competitive advantage, team, timing, investability and exit. Above all, Cabiedes wants entrepreneurs to keep this in mind: "You have to understand that we, as investors, assess business projects, not ideas."
Less Hype and More Business
According to the author, Spain's investment market is immersed in a "double bubble." On the one hand, there is a bubble of excess capital pouring into technology startups, which has resulted in overvaluations and the inefficient use of capital. The second bubble springs from the excessive reverence shown to entrepreneurs and the potential impact of their projects on economic recovery and job creation, which the author characterizes as "a lot of hoopla and nonsense."

So now what? The myth of the entrepreneur must be chopped down to size: "Being an entrepreneur is not about making impressive pitches, or raising as much financing as possible, or entering contests," Cabiedes says. "It's sitting in the office, patiently building a business and, ultimately, creating value and moving a company forward."

The Lean Startup: Customers First
Cabiedes points to statistics that show the vast majority of startups failing quickly because, regardless of their business plan and their wonderful projections put into Excel spreadsheets, they do not have a working business model or a product adjusted to the real needs of their supposed end users.

Therefore, he recommends -- especially for digital businesses, which are subject to a high degree of uncertainty and business risk -- adopting the "lean startup" way of thinking. Also, the business approach should be based on customer development, rather than the more traditional product-development angle.

This means that the business model and product are tested early on and improved over time, receiving input from the customers themselves. It's the only sensible way to meet genuine needs and face market realities.